Press Story

As many as 5 million people are being unfairly overcharged for their energy use, with some paying up to £330 a year more than their neighbours even though they use the same amount of gas or electricity, according to new analysis published by the think tank IPPR.

IPPR argues that enforcing more cost-reflective tariffs would improve competition in the market and more than offset the cost of green policies for affected consumers.

IPPR analysis shows that people who use the same amount of energy and live in the same area are paying vastly different amounts for their energy because of the way they pay their bills. Those who are on a 'standard credit account' (paying for their energy use in arrears) and are so-called 'sticky' customers because they are very unlikely to switch tariff or supplier, are most likely to be paying over the odds. With more than 60 per cent of all households having never switched energy supplier and 34 per cent being on standard credit accounts, over five million may be being overcharged (see Notes to Editors).

The findings support claims that many consumers are being overcharged to subsidise heavily discounted, loss-leading offers for the small minority of customers who regularly switch suppliers. The findings also indicate a lack of competitive pressure in the less price sensitive end of the market.

IPPR tested tariffs for British Gas, EDF, E.ON, Npower, Scottish Power and SSE for three different payment types using a price comparison website for properties in London, Sheffield, Dumfries in Scotland and Aberystwyth in Wales.

Across each, Scottish Power was found to consistently offer the greatest differential between their standard and cheapest tariff at over £330. The difference was greatest in Sheffield at £339 and second greatest in London at £333. Npower offered the second largest differential between these tariffs of up to £315. E.ON was £229. Whilst British Gas, SSE and EDF all offered much smaller differentials of up to £126, £100 and £86 respectively, as a whole the difference in the tariffs offered could not be justified solely by the cost of different payment methods.

Though some energy suppliers have stopped loss-leading offers others continue. IPPR wants the Coalition government and energy regulator Ofgem to do more to remove anti-competitive practices in the energy market to encourage competition between a wider range of energy suppliers - and to act much faster. Upcoming research from IPPR will demonstrate how improving competition in the market could more than offset the costs of green policies to consumers.

Nick Pearce, IPPR Director, said:

"At a time when living standards are falling in real terms and more families are finding it hard to pay their energy bills, it is unacceptable that people are being overcharged for their energy use.

"The loss-leading by some suppliers is limiting competition in the energy market by making it harder for small suppliers and new entrants to compete. Ninety nine per cent of energy customers get their energy from the 'big 6' energy companies.

"Energy companies need stability in the energy market regulatory structure and the tax regime they face. But in return they need to operate in a properly competitive marketplace that is fair to all their customers".

IPPR argues that:

? Ofgem must act with much greater urgency. Ofgem first identified that tariff differentials according to payment type were not cost reflective in 2007. But half a decade later, suppliers are still offering tariff differentials that are not cost reflective.

? Ofgem must enforce the licensing requirements it has introduced to ensure tariffs are cost-reflective and escalate investigations with fines for suppliers that are in breach.

? Ofgem must act to stop suppliers from offering non-cost reflective discounted tariffs. The licensing requirement on cost-reflectivity should be expanded to apply to all tariffs including fixed term, introductory discounts.

A report to be published next month will look at how effectively competition is working in the energy supply market as a whole and what implications this has for the cost of energy.

Notes to Editors

For more information on IPPR's True Cost of Energy project, which this analysis forms part of, please visit http://www.ippr.org/research-project/44/8738/the-true-cost-of-energy

IPPR carried out research to see whether significant differences existed in the prices of tariffs offered to consumers by each of the 'big 6' energy suppliers: British Gas, EDF, E.ON, Npower, Scottish Power and SSE using a price comparison website. We focused specifically on the differences between tariffs for customers on different payment methods. Ofgem has previously identified that some of the tariffs the Big 6 offered to consumers on different payment methods were not reflective of their costs and took action to remedy this. Our analysis looks at whether this action has been successful.

IPPR analysed tariffs using the energy price comparison website energyhelpline.com, which includes all tariffs from each of the 'big 6' UK suppliers in addition to a number of smaller suppliers. The analysis was conducted between 5/12/2011 and 9/12/2011. To observe possible regional variations the analysis was carried out for four localities chosen to represent areas across Great Britain using the following post codes: London N4, Sheffield S10, Dumfries DG1 and Aberystwyth SY23. In total 24 tariffs were included in the analysis.

The annual household energy usage inputted into the price comparison tool was 16.6MWh of gas and 4.5MWh of electricity in line with the average household consumption estimates used by DECC (see for example DECC 2011 Estimated impacts of energy and climate change policies on energy prices and bills). The prices analysed were dual fuel tariffs (where a customer takes both electricity and gas from a single supplier) for each of the big 6. Three tariffs for each supplier were then reviewed: standard credit tariffs (non-direct debited), standard direct debit tariffs and the suppliers' lowest-cost tariffs. We chose not to include pre-payment meter tariffs as they have already been the subject of much attention regarding the fairness of pricing (see for example Ofgem 2010 Update on Probe Monitoring: tariff differentials and consumer switching).

The 'stickiest' customers are those who have changed neither supplier nor tariff payment type since the market was open to competition. It is this segment of customers who are most at risk of being overcharged. According to recent evidence from Ofgem, 16.5 million of the UK's energy customers are with the same supplier for electricity, gas or both fuels since before the liberalisation of the energy market (Ofgem 2011 The Retail Market Review - Findings and initial proposals). At the close of 2007 the proportion of energy customers on standard credit accounts was 40 per cent, a reduction of 1.5 per cent on the previous year (Ofgem 2008 Energy Supply Probe Initial Findings Report). Projecting this trend forward suggests 34 per cent of people are currently on standard credit accounts. If we presume customers on different payment types are equally represented among those people who have not switched supplier then 5.61 million customers are sticky customers on standard credit accounts and may be being overcharged for the energy they use.

Those who are vulnerable or on low incomes are overrepresented among the group at risk of being overcharged. For example 51 per cent of social group AB say they have never switched electricity supplier compared with 68 per cent of social group E, and 56 per cent of social group AB say they have never switched gas supplier compared with 64 per cent of social group E (Ipsos MORI 2011 Customer Engagement with the Energy Market - Tracking Survey).

Contacts:

Richard Darlington: 07525 481 602 / r.darlington@ippr.org

Tim Finch: 07595 920 899 / t.finch@ippr.org